Cost Based Essay

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Pages: 6
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Traditional Costing System

Direct Costs

Direct Labor
Direct Materials

Traced directly Product
Costs

Overhead Costs
Indirect Labor
Indirect Materials
Depreciation

Traced using allocation base eg direct labor hrs, machine hrs

2

Examples of Overhead Activities

¾ Purchase order processing
¾ Receiving/Inventorying materials
¾ Inspecting materials
¾ Processing accounts payable
¾ Facility maintenance
¾ Scheduling production
¾ Customer complaints
¾ Quality inspection/testing
3

1

Activity-Based Costing System
Direct Costs
Direct Labor
Direct Materials

Overhead Costs
Indirect Labor
Indirect Materials
Depreciation

Activities that drive overhd Product
Costs

4

Typical Activity Cost Drivers
¾ Number of alteration notices per product
¾ Units produced
¾ Number of receipts for materials/parts
¾ Stockroom transfers
¾ Direct labor hours
¾ Set-up hours
¾ Inspection hours
¾ Facility hours
¾ Number of customer complaints
5

Cost Allocation Example
Dialglow Corporation manufactures travel clocks and watches.
Overhead costs are currently allocated using direct labor hours, but the controller has recommended an activity-based costing system using the following data:
Activity
Production Setup

Cost Cost Driver
$120,000 No. of setups

Material Handling
& Requisition

30,000 No. of parts

Packaging
& Shipping

60,000 #Units Shipped

Total Overhead
Direct labor hours

Clocks
10

Watches
15

18

36

45,000

75,000

35,000

105,000

$210,000
140,000

6

2

Using Traditional Costing System

Allocate Total OH based on labor hours
(35,000 hours for travel clocks; 105,000 hours for watches.)
OH Rate:
$210,000 / 140,000 hours = $1.50/hour
OH cost per Travel Clock:
($1.50/hr * 35,000 hrs) / 45,000 units = $1.167
OH cost per Watch:
($1.50/hr * 105,000 hrs) / 75,000 units = $2.10

7

Using ABC
Allocation of :
Production Setup Costs: $120,000 / (10+15) setups = $4,800/setup
Material Handl’g Costs: $30,000 / (18+36) part numbers = $555.56/part
Packing/shipping Costs: $60,000 / (45,000+75,000) units = $0.50/unit shipped
Product Costs using ABC:
Production Setup
Material Handling
Packing/Shipping

Activity
Level

Clocks

Activity
Level

Watches

Total
Per Unit

8

Using ABC
Allocation of :
Production Setup Costs: $120,000 / (10+15) setups = $4,800/setup
Material Handl’g Costs: $30,000 / (18+36) part numbers = $555.56/part
Packing/shipping Costs: $60,000 / (45,000+75,000) units = $0.50/unit shipped
Product Costs using ABC:
Production Setup
Material Handling
Packing/Shipping

Activity
Level
10

Clocks
$48,000

Activity
Level
15

Watches
$72,000

Total
Per Unit

9

3

Using ABC
Allocation of :
Production Setup Costs: $120,000 / (10+15) setups = $4,800/setup
Material Handl’g Costs: $30,000 / (18+36) part numbers = $555.56/part
Packing/shipping Costs: $60,000 / (45,000+75,000) units = $0.50/unit shipped
Product Costs using ABC:
Production Setup
Material Handling
Packing/Shipping

Activity
Level
10
18

Clocks
$48,000
10,000

Activity
Level
15
36

Watches
$72,000
20,000

Total
Per Unit

10

Using ABC
Allocation of :
Production Setup Costs: $120,000 / (10+15) setups = $4,800/setup
Material Handl’g Costs: $30,000 / (18+36) part numbers = $555.56/part
Packing/shipping Costs: $60,000 / (45,000+75,000) units = $0.50/unit shipped
Product Costs using ABC:
Production Setup
Material Handling
Packing/Shipping

Activity
Level
10
18
45000

Clocks
$48,000
10,000
22,500

Activity
Level
15
36
75000

Watches
$72,000
20,000
37,500

Total
Per Unit

11

Using ABC
Allocation of :
Production Setup Costs: $120,000 / (10+15) setups = $4,800/setup
Material Handl’g Costs: $30,000 / (18+36) part numbers = $555.56/part
Packing/shipping Costs: $60,000 / (45,000+75,000) units = $0.50/unit shipped
Product Costs using ABC:
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